W3/L3 Internal Analysis and Diagnosis
1. Introduction to Internal Analysis
Internal analysis is an essential step in strategic management that helps organisations evaluate their internal capabilities, strengths, and areas needing improvement. It serves as a counterpart to external analysis (e.g., PESTLE, industry analysis) and is critical for aligning company resources with market opportunities and threats.
Key Concepts Covered:
Critical Success Factors (CSFs)
Value Chain Analysis
Performance Measures
Portfolio Matrices (e.g., BCG Matrix)
Problem and Opportunity Statements
Reference: Johnson, Scholes & Whittington (2005).
2. Critical Success Factors (CSFs)
Definition: CSFs are essential elements that must be performed well to achieve competitive success in an industry. They are derived from customer demands and industry standards.
Examples of CSFs by Industry:
Diamond Trade: Control of raw material supply, brand reputation (e.g., "A Diamond Is Forever").
Sports Footwear: Insights into athlete needs and influence on consumer preferences.
Internet Search Engines: Superior algorithms for accurate results and effective ad pricing.
Online Education: IT infrastructure, technical support, and collaborative teaching methods.
Key Insight: Organisations need to identify CSFs to outperform competitors by focusing on these high-priority areas.
Reference: Lecture notes; Johnson et al. (2005).
3. Performance Measures
Purpose: To answer questions like "Am I doing well or badly?" and to identify areas needing attention. Performance measures should provide a balanced view of an organisation's internal health.
Common Performance Metrics:
Financial Performance: Revenue growth, profitability ratios.
Customer Metrics: Customer satisfaction and retention rates.
Operational Metrics: Efficiency, cycle times.
Innovation Metrics: R&D spending, number of new products launched.
Key Theories:
Kaplan and Norton's Balanced Scorecard (1992) integrates financial and non-financial measures to provide a comprehensive view of performance.
Reference: Kaplan & Norton (1992, 2010).
4. Value Chain Analysis
Definition: A method developed by Michael Porter to analyse specific activities within a firm that add value to products or services and contribute to competitive advantage.
Components of the Value Chain:
Primary Activities:
Inbound Logistics: Sourcing and receiving materials.
Operations: manufacturing and transforming inputs.
Outbound Logistics: Distributing finished products.
Marketing and Sales: Promoting and selling products.
Service: After-sales support.
Support Activities:
Firm Infrastructure: General management, finance.
Human Resource Management: Recruitment, training.
Technology Development: Innovations, IT systems.
Procurement: Purchasing inputs efficiently.
Example:
Zara: A fast-fashion leader due to its integrated value chain, which includes in-house design teams, efficient manufacturing, and a centralised distribution network allowing for rapid product turnover (product cycle of three weeks).
Visual Aid: Diagram of Porter's Value Chain model showing primary and support activities.
Reference: Porter (1985).
5. Portfolio Analysis: The BCG Matrix
Purpose: To assess the performance and growth potential of a company's business units or products.
BCG Matrix Components:
Stars: High market growth, high market share. Require significant investment to maintain position.
Cash Cows: Low market growth, high market share. Generate consistent revenue with minimal investment.
Question Marks: High market growth, low market share. Need analysis to determine if investment is justified.
Dogs: Low market growth, low market share. Candidates for divestment.
Strategic Implications:
Balanced portfolios ensure that an organisation has units that generate cash (Cash Cows) and those that promise future growth (Stars and Question Marks).
Reference: Henderson (1970).
6. Problems and Opportunities Statements
Definition: A strategic tool used to highlight areas where an organisation must act to capitalise on opportunities or address potential threats and weaknesses.
Components of an Effective Statement:
Capabilities Related to CSFs: Evaluating if current capabilities meet critical industry standards.
Other Opportunities: Identifying new market possibilities.
Future Opportunities: Recognising areas where capabilities need development.
Problems to Address: acknowledging external threats or competitive weaknesses.
Strategic Challenges: Outlining major strategic issues based on analysis.
Evaluation Tips:
Be specific and actionable.
Use strong links to situational analysis and CSFs for justification.
Ensure clarity and alignment with strategic goals.
Reference: Kotler (2000); Lecture notes.
7. Strategic Implications of Internal Analysis
Internal analysis provides a foundation for strategic decision-making by identifying an organisation’s strengths, weaknesses, and potential growth paths. It bridges the gap between external market opportunities and internal resources to create strategic plans that leverage competitive advantages effectively.
Reflection Question: How can firms align their CSFs with long-term strategic goals to maximise their market position?
Conclusion
Internal analysis is a crucial step in understanding an organisation’s position within its industry. By using tools like the value chain, performance measures, and the BCG matrix, organisations can assess where they add value and what adjustments are necessary for strategic growth. Articulating clear problems and opportunities helps build actionable strategies aligned with critical success factors and external market conditions.
Next Steps:
Apply these analytical tools in practice (e.g., case study on Netflix).
Prepare for high-level strategy analysis in the next lecture.
References:
Johnson, G., Scholes, K., & Whittington, R. (2005). Exploring Corporate Strategy.
Kaplan, R., & Norton, D. (1992). The Balanced Scorecard.
Kotler, P. (2000). Marketing Management: The Millennium Edition.
Porter, M. E. (1985). Competitive Advantage.
Henderson, B. D. (1970). The Product Portfolio (BCG Perspectives Series).